BUSINESS 1. OVERVIEW. Note:

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1 1. OVERVIEW We are one of the leading FCR chain operators selling Japanese noodles (ramen) and Japanese-style dishes in the PRC and Hong Kong under the logo and Ajisen brand name. FCRs are a hybrid of fast-food and traditional sit-down restaurants. We are accredited by the China Cuisine Association as one of the largest Japanese-style FCR chain operators in the PRC in terms of number of chain restaurants. As at the Latest Practicable Date, our Group had a restaurant portfolio totaling 122 Ajisen chain restaurants, of which 92 are owned and managed by us, 24 are managed but not owned by us, three are owned but not managed by us, and three are sub-franchised. These 122 restaurants comprise 32 in Shanghai, 12 in Shenzhen, eight in Beijing, 51 in other regions of the PRC and 19 in Hong Kong. We have categorised our Ajisen restaurants into flagship-size, standard-size and economy-size restaurants, depending on their size. We have entered into the Framework Agreement for the management of all restaurants owned by Shenzhen Weiqian (1). We believe that we have a significant market position in our core markets, namely Shanghai, Shenzhen and Hong Kong and we plan to expand our network to a total of 320 by the end of On 16th January 2007, we entered into an investment agreement with our Franchisor, Katsuaki Shigemitsu and two other Independent Third Parties to establish a joint venture company in Taiwan for the purpose of establishing the Ajisen business in Taiwan, in which we will hold a 15% interest. Our Group will be a minority investor and will not have management control of this joint venture company. It is intended that this joint venture company will become the holding company for all future Ajisen chain restaurants to be opened in Taiwan. Besides our industry ranking of 5th place among the fast food restaurants in the PRC in terms of revenue in the China s Top 100 F&B Enterprises list in 2005, we have also been recognised as a Famous F&B Brand Enterprise for 2004/2005 by the Shanghai Restaurants Association. In Hong Kong, we have been accredited as a quality restaurant under the Quality Tourism Services Scheme (QTS) of the Hong Kong Tourism Board. Our pork-rib soup ramen dishes have been tested and certified as healthy and nutritious by the China Cuisine Association. To leverage on our Ajisen brand and complement our FCR business, we also manufacture and sell packaged noodles under the logo and Ajisen brand name. We supply our packaged noodle products to our sub-franchised Ajisen restaurants, chain restaurants operated and managed by us, to other third-party restaurant operators, supermarkets, and other independent Ajisen restaurant outlets located in other countries such as Australia, Canada, the Philippines, Singapore and the United States. Some of our major clients in the PRC and Hong Kong include Walmart, Carrefour, Lotus Supermarket, City Supermarket, JUSCO, Wellcome and Park nshop. Besides manufacturing packaged noodles, our food manufacturing and processing facilities also process all the food ingredients, cooked and semi-cooked food for all our self-managed and sub-franchised Ajisen chain restaurants. Note: (1) Shenzhen Weiqian currently owns 23 Ajisen restaurants and 1 Aji-Gyu/ restaurant, all of which are situated in Guangdong province, Wuhan and Chengdu. The Aji-Gyu restaurant specialises in Japanese-style barbequed foods. 95

2 2. AJISEN PHILOSOPHY We believe that our success can be attributed to our management team s determined focus on 5 core values which we have developed over the years. These 5 core values, or what we refer to as the 5Cs concept, are the key fundamental principles of operations of our Group, namely: (1) strong brand equity via brand building; (2) comprehensive site selection, focusing on prime areas and CBDs; (3) innovative business model incorporating the advantages of both traditional Chinese full-service restaurants and Western fast food; (4) specially designed menu that matches with Asian food culture; and (5) pleasant dining environment with a modern and strong cultural ambience. We believe that our Ajisen philosophy has enabled us to successfully expand our Ajisen chain restaurant network throughout the PRC. 3. OUR PRINCIPAL STRENGTHS By capitalising on our 5Cs, we have successfully developed the following principal strengths: We have a strong brand name We operate an extensive and strategic restaurant network covering prime locations in major PRC cities and Hong Kong We are innovative in our product development We combine traditional Japanese technique with modern production technology We have a proven restaurant management and business model which can be easily adopted in other regions of the PRC We have an experienced and professional management team We have a strong brand name We have successfully established an image as a provider of modern, high quality, healthy and authentic Japanese food. We adopt a consistent high level of quality control to ensure excellence in food product quality and service for maximum customer satisfaction. We seek to differentiate ourselves from our competitors by serving a variety of ramen and Japanese-style dishes that cater for the different tastes and preferences of our customers. Since commencing business in 1995, we 96

3 have successfully built a reputation for our Ajisen ramen as a premium quality, healthy, authentic and delicious product. In recognition of this, the China Cuisine Association has certified our food products as healthy and nutritious. Over the years, we have obtained numerous awards and recognitions from various organisations. Please refer to the paragraph headed Awards under this section for more information on our awards and industry recognitions. As a result, we have been able to attract new customers and enhance customer loyalty with our strong brand name. Our focus is to provide efficient and friendly service. Some of our service staff have had prior experience working in other F&B companies and each of our Ajisen restaurant is staffed with experienced management personnel who constantly supervise and provide on-the-job training to our staff. Our strong brand name has given us a leverage to successfully establish our restaurant network in strategic locations such as prime locations with high pedestrian traffic and easy accessibility for customers. We also believe that we are a valued and preferred tenant for shopping malls, allowing us to negotiate favourable leasing terms with these landlords. We operate an extensive and strategic restaurant network covering prime locations in major PRC cities and Hong Kong In addition to Hong Kong, we have also established a restaurant network which covers some of the fastest growing cities and major provincial capitals in the PRC such as Shanghai, Beijing, Hangzhou, Shenzhen and Wuhan. As demand for quality dining in these affluent cities is expected to rise due to the increase in spending power of the PRC population, we believe that we will benefit from the strong growth potential and opportunities. We strive to establish our Ajisen restaurants in prime locations with high pedestrian flow and which are highly accessible to our target customers in these affluent and high growth regions. For instance, in Shanghai, we are located in the Huai Hai Road shopping district and the Lujiazui financial district. In Hong Kong, our Ajisen restaurants are located in busy commercial districts such as Mongkok, Causeway Bay and Tsimshatsui. We believe that a network of restaurants at prime locations in various major cities not only helps us in establishing a solid business channel, but also allows us to build the Ajisen brand into a premium FCR. We are innovative in our product development We strive to maintain an innovative, evolving and wide-ranging menu which is well suited to the taste of customers from different regions in the PRC and Hong Kong by combining Japanese-style dishes with Chinese food culture and dining habits. As the main features of our chain restaurant business are our white soup and ramen, we have created many new and different recipes revolving around these 97

4 two principal ingredients, adapting to the local culture and taste preferences in different regions. Our menus are updated twice a year. For instance, we have introduced the tenderous ribs noodles, spicy Ajisen noodles and abalone ramen, which are all created from our white soup and ramen. In order to maintain our competitiveness and enhance our market position, we continuously strive to expand and improve our product offerings. We currently have more than 60 food product offerings in our menus. We believe our focus on innovation has enabled us to differentiate our food products in the PRC and Hong Kong markets and strengthened our brand awareness and market share. We combine traditional Japanese technique with modern production technology We adopt Japanese technology and methods in our ramen production. As we believe that the ramen production technology from Japan is considered one of the most advanced in the world, we have adopted Japanese techniques in the production of ramen which entails the right proportion and composition of ingredients, mixing methods and drying periods. In accordance with the terms of our Franchise Agreements, our Franchisor provides us with technical support in all aspects of our packaged food production. Please refer to the paragraph headed Production under this section for more information. We have a proven restaurant management and business model which can be easily adopted in other regions of the PRC Having accumulated almost 10 years of experience in the FCR market in Hong Kong and the PRC, the Group has developed a management and business model which we believe would allow us to easily expand to other regions in the PRC. We have established and implemented a set of systematic procedures and management guidelines which we apply when opening a new Ajisen restaurant. We have organised our Group in such a manner that our Subsidiaries, namely Shanghai Lead Food, Hangzhou Weiqian, Nanjing Weiqian, Shandong Weiqian, Beijing Weiqian and Chongqing Weiqian act as autonomous divisional management offices to operate and manage our Ajisen chain restaurants established in their respective areas. Currently, we have 6 divisional management offices. We believe this business and operational model will allow us to expand at a faster and more efficient pace since these regional head offices will have the local expertise to facilitate our expansion plans. We intend to replicate our management model in running all our new Ajisen chain restaurants. We have an experienced and professional management team Our senior management has extensive managerial experience from a diversity of background. We believe that our Group s track record demonstrates the ability of our senior management to develop our Group s business effectively. Prior to joining our Group, several members of our senior management team have held senior 98

5 positions in other food service or food service related organisations. We believe that their industry and management experience will provide significant contributions to our success and future advancement. Please refer to the section headed Directors, Senior Management and Staff for more information on our management team. 4. OUR STRATEGIES We aim at continuing to grow and expand our business as a leading FCR operator selling ramen and Japanese-style dishes in Hong Kong and the PRC. In order to enhance the Ajisen brand penetration and awareness, we have identified the following as our major growth drivers in order to pursue our growth objectives: Expand our FCR network Diversify our product offerings and distribution channels Embark on a multi-brand strategy Expand our FCR network Our Ajisen chain restaurants are our principal source of revenue. Hence, we expect our chain restaurants to play an integral part in our revenue and profits generation. As we see vast potential in the Hong Kong, Taiwan and PRC markets, we intend to expand our FCR network in these areas. We aim to establish a minimum of 200 chain restaurants by the end of 2007 and a total of 320 by No. of Restaurants Regions Present 07 +/- 08 +/- Eastern China (1) Southern China (2) Northern China (3) Central China (4) Sub-franchise restaurants Total Production facilities 2 +2 Logistics centers 3 +1 Notes: (1) Includes Zhejiang and Jiangsu Provinces and Shanghai (2) Includes Fujian and Guangdong Provinces and Hong Kong (3) Includes Shandong and Liaoning Provinces and Beijing (4) Includes Sichuan, Hunan and Hubei Provinces and Chongqing In order to attain our target number of restaurants, we have adopted 3 methods to grow our FCR network (1) organic growth; (2) sub-franchise arrangements; and (3) mergers and acquisitions or collaboration with third parties. 99

6 Organic Growth We intend to concentrate our organic growth in existing markets such as Shanghai, Shenzhen, Hong Kong, Beijing and Chengdu. We intend to open 35 flagship-size restaurants, 170 standard-size restaurants and 62 economy-size restaurants by Sub-franchise arrangements Although our main focus will be on the expansion of self-owned restaurants in the PRC market, we believe that selective sub-franchise development will complement our growth strategies and enhance operational efficiency, brand penetration and awareness as well as regional footprint. We plan to focus our sub-franchise network in the second-tier and third-tier cities in the PRC as they are currently undergoing development and are progressively growing in importance. We have entered into a consultancy agreement with Link-C, an Independent Third Party, to assist us in strengthening our network infrastructure and standardising our operational procedures, as well as to assist us in setting out an uniform and scalable subfranchise business model. Link-C is a Subsidiary of Link Consulting Associates- Japan, which is one of the larger consulting firms in Japan with approximately 40 years of experience in consulting. We have paid Link-C a total of RMB350,000 for consultancy services during the Track Record Period. We aim to establish an additional 10 sub-franchise restaurants by 2007 and another 40 by In order to ensure the Ajisen dining experience is consistent throughout our network, we need to have a standardised and scalable system to support the subfranchise growth. We therefore plan to establish an Ajisen training institute in Shanghai to provide professional training for our sub-franchisees to operate Ajisen restaurants under our stringent control on brand usage as well as the quality of food and services. The target sub-franchise candidates will typically be established local operators with good logistics capabilities because it will reduce our investment risks as we expand into new geographical locations. Mergers and acquisitions/collaborations with third parties As part of our expansion plans, we will consider acquiring suitable companies which will complement our current business model or enter into joint ventures with local partners and foreign restaurant chains to establish new Ajisen restaurants or new brands at strategic locations. We will assess whether the acquisition target offers potential turnaround opportunities which we can leverage on by using our brand equity to improve the target s operations and hence yield a positive contribution to the Group. Collaboration with other food manufacturers is another avenue which we are interested in exploring as we seek to further expand our product offerings. In respect of our investment plans in Taiwan, on 16th January 2007, we entered into an investment agreement with our Franchisor, Katsuaki Shigemitsu, and two Independent Third Parties to establish a joint venture company in Taiwan for the purpose of establishing the Ajisen business in Taiwan. Our Group will be a minority investor and will not have management control of this joint venture company. This joint venture company is owned as to 15% by us, as to 20% by each of our Franchisor and Katsuaki Shigemitsu, and as to 25% and 20% by the other two 100

7 Independent Third Parties respectively. Each of Poon Wai, Poon Ka Man Jason and Katsuaki Shigemitsu has agreed that all future business activities of the Group in Taiwan will be conducted through this joint venture company or other similar ventures in which our Group shall have at least a 15% interest. Each of Poon Wai, Poon Ka Man, Jason and Katsuaki Shigemitsu has undertaken that he or she will not set up his or her own business which may or will compete with our Group. As part of the Group s corporate governance measures, as long as Katsuaki Shigemitsu remains a Director of the Company, any future transactions with this joint venture company which are subject to Chapter 14A of the Listing Rules and any future investment or divesture in this joint venture company will be subject to the Group s independent non-executive Directors review and relevant disclosures will be made in annual reports and announcements. Other than our investment in Taiwan, we have not identified any potential targets or partners to collaborate or negotiate with as at the Latest Practicable Date. Diversify our product offerings and distribution channels We intend to diversify our product offerings. In order to retain customers and attract new ones, we plan to constantly innovate and refresh our menu to cater to our customers changing tastes and preferences. Consumer tastes and preferences are constantly evolving and the demand for fresh new variety is constantly increasing as urbanisation continues. The success of our business thus depends on our ability to continuously improve and expand our product offering to cater to the changing consumer preferences. The sustainability of our business also rests upon our ability to build an Ajisen culture which extends beyond our FCR restaurants into our customers daily life. We plan to diversify our existing products in our distribution network and give our customers wider offerings than packaged Japanese-style ramen by introducing new products such as specialised soup condiments for noodles. Furthermore, we intend to introduce Ajisen-branded commodities such as bowls and other dining utensils for sale at our restaurants, department stores, supermarkets, shopping centres and distributors as part of our brand enhancement effort. Embark on a multi-brand strategy We intend to leverage on our know-how in Japanese food and Japanese food production technology to expand our customer base and reach out to different consumer segments along the casual dining value chain. Currently, our Ajisen brand is targeted at the mass market with an average spending of around HK$50 per head for Hong Kong and around RMB30 for the PRC. We intend to cultivate other brands with the appropriate channels and products to reach out to customers in the higher-spending as well as the lower-spending groups. Based on the above business strategies, we estimate our capital expenditure for the financial year ended 31st December 2006 to be approximately HK$65.0 million and for the financial years ending 31st December 2007 and 2008 to be approximately HK$209.0 million and HK$414.7 million respectively. 101

8 5. AWARDS Over the years, we have received awards and obtained recognitions from various industry associations. These include: Award Year Granting Body China s Top the Department of Commercial F&B Enterprises Reform and Development of the MoC, (ranked 7th among the China Cuisine Association and the fast food restaurants the China National Commercial Information in the PRC in terms Centre of revenue) (ranked 5th among the 2005 fast food restaurants in the PRC in terms of revenue) Famous F&B Brand 2004/2005 Shanghai Restaurants Enterprise Association Gold Prize: Tenderous 2004 Shanghai Food Culture Exhibition 2004 Ribs Noodles organised by the Shanghai Business Association Gold Prize: Beef 2004 Shanghai Food Culture Exhibition 2004 Curry Udon organised by the Shanghai Business Association Top 100 China 2006 World Eminence Chinese Enterprises Worthy Business Association of Investments Certified as healthy and 2006 China Cuisine Association nutritious by the Food Nutrition Committee of China Cuisine Association China s Top China Cuisine Association Fast Food Brand Enterprises Accredited as a quality 2006/2007 Hong Kong Tourism Board restaurant under the Quality Tourism Services Scheme (QTS) 102

9 6. THE AJISEN FRANCHISE Pursuant to the Franchise Agreements, we have secured a perpetual franchise for the Franchise Business in Hong Kong, Macao and the PRC which is subject to a review of the business arrangements in every 38 years and, if necessary such adjustments to be made to the operation of the Franchise Businesses as the parties may deem fit. There are no conditions and costs for the renewal or termination of the Franchise Agreements nor are we bound to open any additional restaurants each year under the Franchise Agreements. Hong Kong Pursuant to the HK Franchise Agreement, our Franchisor has granted us a sole, exclusive and perpetual franchise to operate the Franchise Businesses under the Ajisen trademarks, and the right to sub-franchise the Franchise Business to other third parties in Hong Kong without their prior consent. As franchisee, we are bound by the following terms under the HK Franchise Agreement, including but not limited to: payment of franchise fee, an annual technical fee and/or cost of supplies to our Franchisor; usage of the unique white soup base and condiments designated by our Franchisor for the operation of the Franchised Businesses; to comply with all laws, bye-laws and regulations applicable to the business; to conduct the business in an orderly manner and to comply with the methods of production and maintain the quality of the products; to maintain and upkeep the restaurants and/or premises for business so as to maintain the reputation of the Ajisen trademarks and to promote the business; and to furnish our Franchisor with an audited profit and loss account of the Franchised Businesses annually. The HK Franchise Agreement may be terminated if: (i) (ii) the franchisee fails to pay the franchise fee, the technical fee and/or the cost of supplies, if payable, in accordance with the agreement; the franchisee fails to use the unique soup base and condiments designated by the Franchisor in the operation of the Franchise Businesses; or 103

10 (iii) the franchisee is subject to any winding-up order of the court. Under the HK Franchise Agreement, we are obligated to pay a monthly franchise fee of HK$7,000 per restaurant and an annual technical fee based on a percentage of the gross annual income of the manufacturing operations in Hong Kong. Presently, we do not manufacture our packaged noodle products in Hong Kong. PRC Pursuant to the PRC Franchise Agreement, our Franchisor has granted us a sole, exclusive and perpetual franchise to operate, and to sub-franchise to any parties the right to operate restaurants in the PRC under the Ajisen trademarks, without having to seek any prior consent from the Franchisor. We are bound by the following terms under the PRC Franchise Agreement: payment of the trademark fee, franchise fee, an annual technical fee and/or cost of supplies to our Franchisor; usage of the unique white soup base and condiments designated by our Franchisor for the operation of the Franchised Businesses; to comply with all laws, bye-laws and regulations applicable to the business; to conduct the business in an orderly manner and to comply with the methods of production and maintain the quality of the products; to maintain and upkeep the restaurants and/or premises for business so as to maintain the reputation of the Ajisen trademarks and to promote the business; and to furnish our Franchisor with an audited profit and loss account of the Franchised Businesses annually. In addition, our Franchisor is bound by the following terms under the PRC Franchise Agreement: to offer us the first right to purchase its business, trademarks, formulae for the soup condiments and soup base or any other Ajisen intellectual property rights at the same price and on the same conditions available to any third party in the event that it decides to sell any of the above; and to purchase goods from us in the PRC on a preferred basis against other suppliers in the event that it intends to make any purchase in the PRC. 104

11 The PRC Franchise Agreement may be terminated if: (i) (ii) (iii) the franchisee fails to pay the trademark licence fee, the technical fee and/or the cost of supplies, if payable, in accordance with the agreement; the franchisee fails to use the unique soup base and condiments designated by the Franchisor in the operation of the Franchise Businesses; or the franchisee is subject to any winding-up order of the court. Under the PRC Franchise Agreement, we are obligated to pay a monthly franchise fee of RMB3,500 per restaurant and an annual technical fee based on a percentage of the gross annual income of the manufacturing operations in the PRC. 7. OUR AJISEN CHAIN RESTAURANTS Our ramen and menu We market and sell our ramen with a unique white soup made from pork ribs. In Japan, ramen is generally served with three basic kinds of soups, categorised by their flavour: (1) white soup; (2) miso soy bean paste soup; and (3) soy sauce soup. We have chosen to serve our ramen in white soup as we feel that this soup is not only tasty but also most familiar and suitable to the culinary habits and taste preferences of our local consumers in Hong Kong and the PRC. Our Ajisen chain restaurants menu features interesting creations that showcase varieties which capture the tastes and flavours that our customers can identify with. We have revolved around our special Japanese white soup base and ramen in creating new recipes to adapt to the local taste of our customers in different regions. All our ramen dishes are served in the white soup and topped with different food items such as pork, deep fried chicken, beef and abalone, depending on individual customer s preference and order. Our special Japanese white soup is derived from a unique secret recipe formulated and produced by our Franchisor. Some of our food product offerings and best-sellers include tenderous ribs ramen, our trademark Ajisen ramen consisting of char siew (barbeque pork), kimchi, bean sprouts and braised egg, Japanese panfried dumplings and beef enoki roll (golden needle mushroom wrapped in beef). Our menu is further supplemented by other Japanese-style dishes typically found in most Japanese restaurant menus such as rice sets, stone-pot sets, barbecued foods, side dishes and desserts. We currently have more than 60 regular food choices in our menu for our customers to choose from. Our pork-rib soup ramen dishes have been tested and certified as healthy and nutritious by the China Cuisine Association. We review our menu regularly and revamp it when necessary. As we innovate new recipes to cater to the taste preferences of our consumers in Hong Kong and the PRC, our menus in different regions may vary slightly in content. In order to cater to the variety of tastes and preferences of the large consumer market, we will, from time to time, develop and introduce some new recipes to our Ajisen chain restaurants. We would first conduct a market tasting of each new recipe by introducing it to certain selected restaurants to gauge our customers acceptance of the new 105

12 recipe. These dishes would then be introduced to the rest of our Ajisen chain restaurants if customer feedback proves satisfactory. Please refer to the paragraph entitled Product Development under this section for more information on our product development efforts. Our restaurant customers Our target customers are customers between the ages of 20 and 40 who are looking to dine in a comfortable and aesthetically pleasing environment at affordable prices. We believe that this group of people are the ones who have a relatively higher level of spending power, given that their education and income levels have been steadily increasing over the years. As our Ajisen chain restaurants are involved in retail sales, none of our customers accounted for more than 30% of our turnover in the Track Record Period. Our customers are walk-in customers and regular patrons, whose individual annual expenditure at our various Ajisen chain restaurants do not constitute a significant percentage of our turnover. Most of our sales are paid at the time of purchase by cash. Our sales in the PRC and Hong Kong are denominated in Renminbi and Hong Kong dollar respectively. 106

13 Our Ajisen Chain Restaurant Network As at the Latest Practicable Date, we have a portfolio of 122 Ajisen chain restaurants in the PRC and Hong Kong. We are well represented in the major cities in the PRC such as Shanghai, Beijing and Shenzhen. The following map shows the number of Ajisen chain restaurants as at the Latest Practicable Date: Map of Shanghai Baoshan Yangpu Zhabe i Hong kou Put uo Jing an Huangpu Changn ing Luw an Pudo ng Minhang Xuhui 107

14 The following table summaries the number of Ajisen restaurants in Hong Kong and the PRC as at the Latest Practicable Date: Average Average Average number of Number of Total saleable Total number of Total employees Ajisen chain saleable area per number seats per number of per City restaurants area restaurant of seats restaurant employees restaurant (sqm) (sqm) Owned and Managed by us: Northern China Beijing 8 2, Qingdao 5 1, Dalian Yantai Weifang Weihai Eastern China Shanghai (1) 31 9, , , Nanjing (2) 4 1, Hangzhou Suzhou Wuxi Changzhou Changshu Jiangyin Ningbo Central China Wuhan Chongqing 4 1, Chengdu Changsha Southern China Humen Dongguan Hong Kong 17 1, , Managed but not Owned by us: Eastern China Shanghai (3) Southern China Shenzhen 12 2, , Zhuhai Dongguan 3 1, Foshan Jiangmen Zhongshan Central China Wuhan Chengdu Owned but not Managed by us: Southern China Fuzhou Total: ,302 N/A 13,937 N/A 3,850 N/A Sub-franchised restaurants (not owned or managed by us) (4) : Haikou 1 Hong Kong

15 Notes: (1) Includes one restaurant which has ceased operation and excludes two restaurants which are undergoing de-registration. (2) Includes one restaurant (i.e Nanjing Beijige restaurant) which has temporarily ceased operations as our landlord is undergoing liquidation. (3) We have entered into an asset acquisition agreement with (Shanghai Jiacai Ramen Restaurant) ( Shanghai Jiacai ), an Independent Third Party, for the acquisition of its business assets situated in a restaurant in Shanghai. We are currently in the process of applying for the transfer of the lease and a business licence. In the interim, Shanghai Jiacai has allowed us to operate and manage their restaurant as an Ajisen restaurant, with all revenue earned by the restaurant belonging to our Group. (4) As these sub-franchised restaurants are not owned or managed by us, information relating to their saleable area, number of seats and employees are not available. The following table shows the operational data of the Ajisen restaurants in Hong Kong and the PRC which are owned and/or managed by our Group (1) : Southern Eastern Central Northern China (2) China (3) China (4) China (5) Average traffic flow per store per day Average per capita spending (RMB) Average table turnover per day Average bowls of noodles sold per day per store Notes: (1) All data are based on November and December 2006 management figures. (2) Includes Hong Kong. (3) Includes Shanghai, Nanjing, Hangzhou, Suzhou, Wuxi, Changzhou, Changshu, Jiangyin, Ningbo. (4) Includes Chongqing, Changsha, Chengdu, Wuhan. (5) Includes Beijing, Qingdao, Yantai, Weifang, Weihai, Dalian. We have not experienced any interruptions with a significant effect on our financial position in the past 12 months prior to the Listing Date. 109

16 Our Sub-franchisees Hong Kong We entered into two sub-franchise agreements on 13th August 2002 and 9th October 2003 with Select Service Partner Hong Kong Limited, an Independent Third Party, for the operation of two Ajisen restaurants in the departure and arrival halls of the Hong Kong International Airport. Select Service Partner Hong Kong Limited is the airport catering operator and has been granted licences and concession rights to operate restaurants at the Hong Kong International Airport. Under the first sub-franchise agreement dated 13th August 2002, the term of the sub-franchise agreement is for a term of 86 months, beginning from the earlier of the date immediately following the expiration of the fit-out period or the date of commencement of business (which was on 17th September 2002). The term of the second sub-franchise agreement dated 9th October 2003 is for a period of 82 months from the earlier of the date immediately following the expiration of the fit-out period or the date of commencement of business (which was on 10th November 2003). Both agreements are not renewable. The two sub-franchise agreements may be terminated prior to their expiry under the following conditions: if the sub-franchisee fails to pay the royalty fee and costs of supplies; if the sub-franchisee fails to maintain a reasonable standard of operation of business; if the sub-franchisee s licence to operate restaurants in the Hong Kong International Airport is terminated; by mutual agreement between the parties; or if a force majeure event continues for 90 days. Under the first sub-franchise agreement dated 13th August 2002, the sub-franchisee will pay us an initial royalty fee of HK$300,000 and a monthly royalty fee based on 2% of its net sales, as well as for the cost of supplies. Under the second sub-franchise agreement dated 9th October 2003, the sub-franchisee will pay us an initial royalty fee of HK$100,000 and subsequently a monthly royalty fee ranging from 2% to 3% of its net sales, such percentage being dependent on the level of monthly sales of the sub-franchisee. During the three financial years ended 31st December 2005 and the nine months ended 30th September 2006, the revenue derived from the two sub-franchise agreements were approximately HK$5.9 million, HK$11.1 million, HK$10.9 million and HK$8.3 million respectively. PRC A third sub-franchise agreement was initially entered into between Ajisen Ramen Group and Select Service Partner Hainan Company Limited, an Independent Third Party dated 28th February 2005, prior to the Reorganisation for the establishment of an Ajisen sub-franchised restaurant in Meilan Airport in Haikou, Hainan (PRC). On 1st March 2007, a novation agreement was made between Ajisen Ramen Group, Shenzhen Weiqian, Select Service Partner Hainan Company Limited and Festive Profits to transfer the sub-franchise rights from Ajisen Ramen Group to a member of our Group. 110

17 Under the sub-franchise agreement dated 28th February 2005, the term of the sub-franchise agreement is for a term of seven years commencing 1st July The agreement is not renewable and may be terminated prior to its expiry under the following conditions: if the sub-franchisee fails to pay the royalty fee and costs of supplies; if the sub-franchisee fails to maintain a reasonable standard of operation of business; if the sub-franchisee fails to observe and perform its obligations under the sub-franchise agreement; if the sub-franchisee s licence to operate restaurants in the Meilan Airport is terminated; by mutual agreement between the parties; or if a force majeure event continues for 90 days. The sub-franchisee paid an initial royalty fee of RMB300,000 to Ajisen Ramen Group and, commencing 1st March 2007, will pay us a monthly royalty fee ranging from 2% to 3.5% of its net sales, such percentage being dependent on the level of monthly sales of the sub-franchise. Ajisen Ramen Group does not have any other sub-franchising rights and has not entered into any other sub-franchise arrangements in the PRC. Restaurant Opening and Site Selection Our development department is in charge of expanding our restaurant network. Before the opening of each Ajisen restaurant, we conduct a series of feasibility studies. To assist us in conducting the feasibility studies, we have compiled a procedural manual stipulating the critical and important factors to consider for the establishment of a new Ajisen restaurant, including but not limited to the following: the location, neighbourhood and accessibility of the site (e.g. whether it is located near any large shopping malls, educational institutions, entertainment venues, residential areas, etc.); the flow of pedestrian traffic; consumption trends of the population in that particular area; projections on the return on rentals; composition of tenants (e.g. whether there are any other reputable brand names which have opened stores nearby); and potential competition in the same area. 111

18 Our site selection and restaurant opening process is as follows: (1) Site Selection Our restaurants are usually situated at one of the following site locations, namely: busy commercial districts with high pedestrian flow; entertainment centres; major shopping malls and office buildings; business districts; residential estates; airports and train stations; large scale hypermarkets; and tourist attractions. 25% of our Ajisen chain restaurants are located in newly established commercial and residential estates in the PRC. We believe that as these newly established commercial and residential estates become more well established and developed, the pedestrian flow in these areas would correspondingly increase, thereby benefitting our business operations. We rely on our development department to source and identify suitable locations. Occasionally, we also employ a professional consultancy company or real estate agent to assist us in finding potential sites. (2) Internal business evaluation Once we have identified some potential sites, we will commence our internal due diligence procedures. We have developed a set of standard due diligence procedures to which we must adhere to every time a potential site for a restaurant is identified. Our internal due diligence procedures entail a six-step process through which the opinions and approvals of our development, engineering, marketing and finance departments, our legal consultant, and our general manager are sought based on a checklist of a wide-ranging variety of matters. For instance, we will seek our engineering department s advice on whether the potential site complies with the departments requirements for installing our kitchen equipment, or the overall condition of the premises. Once the general manager of the management office in charge endorses and approves the results of our due diligence, our development department will approach the landlord to begin negotiations of the lease. 112

19 (3) Lease negotiations and the signing of the lease agreement Once our internal business evaluation procedures have been complied with, and each of our relevant departments has given us its approvals to proceed, we will contact the landlord to commence negotiations on the terms and conditions of our lease. Upon the successful completion of negotiations with the landlord, we will execute the lease agreement. Most of our tenancies in the PRC run for an average of 6 to 10 years, while in Hong Kong, most of our tenancies run for an average of 2 to 3 years with some granting us an option to renew for another 2 to 3 years. (4) Restaurant renovations and opening The site is then equipped with kitchen equipment and renovated in accordance with our recommended restaurant format. We take an average of two months to complete the renovations for each chain restaurant. For more details of our restaurant format, please refer to the paragraph headed Restaurant sizes below. (5) Regulatory Compliance As we have encountered some regulatory problems in the past due to our rapid expansion, we have also implemented a clear set of internal compliance guidelines for opening of our new restaurants in the PRC to prevent breaches of regulations, in which our administrative, marketing, engineering, finance and development departments have been tasked with applying for all relevant licences and approvals which we will require each time a new restaurant opens. Please refer to the paragraph headed Hong Kong and PRC Regulatory Compliance under this section for more information on the regulatory problems experienced by us in the past. Restaurant Sizes Depending on the location of the Ajisen restaurant and the terms of the individual lease, the size of our Ajisen restaurants varies. We are flexible with regard to floor area and do not require much space in order to operate an Ajisen chain restaurant. We have divided our Ajisen restaurants into three different restaurant sizes: (1) flagship-size restaurants; (2) standard-size restaurants and (3) economysize restaurants. The Ajisen flagship-size restaurants are found in the prime locations such as CBDs and business centres which occupy a saleable area of 400 sqm or more and have seating capacity of 151 to 230 seats. The Ajisen standard-size restaurants are our most common restaurants which occupy a saleable area of 100 to 400 sqm and have seating capacity of 71 to 150 seats. Most of our Ajisen standard-size restaurants are located at entertainment centres, shopping malls, airports and train stations. To further expand our urban footprint, we will establish Ajisen economy-size restaurants which occupy a saleable area of approximately 100 sqm with seating capacity of 45 to 70 seats and are mostly located in 113

20 hypermarkets and large-scale residential areas. The following table summarises the number of flagship-size, standard-size and economy-size restaurants managed and/ or owned by us in Hong Kong and the PRC as at the Latest Practicable Date: Standard-size & Flagship-size economy-size >400 m 2 <400 m 2 Northern China 1 18 Beijing 0 8 Others 1 10 Eastern China 7 40 Shanghai 5 27 Nanjing 2 10 Others 0 3 Southern China 5 37 Shenzhen 1 11 Hong Kong 17 Others 4 9 Central China 3 8 Chengdu 1 2 Chongqing 1 3 Other 1 3 Total We currently have a seating capacity of approximately 2,887, 10,917 and 393 seats in our flagship-size, standard-size and economy-size restaurants respectively. As far as practicable, we strive to create uniformity in our branding by standardising the layout and design of our Ajisen chain restaurants. Most of our Ajisen chain restaurants are designed in a modern Japanese style. Our standardised 114

21 restaurant format may occasionally differ depending on the size and layout of the restaurant. The following pictures illustrate some of the formats of our restaurants: Restaurant Management The following table shows the consolidated information on the basic operations of the Ajisen chain restaurants in the PRC and Hong Kong which are owned and/or managed by our Group: 30th 31st December September Number of restaurants owned and managed Number of restaurants managed but not owned Number of restaurants owned but not managed Total:

22 Total revenue from restaurants owned and managed (RMB million) Average daily revenue (RMB) (1) 289, ,046 1,037,712 1,392,806 Total management fees received from restaurants managed but not owned (RMB) ,298,623 Note: (1) this is derived by total revenue from restaurants owned and managed divided by number of days during the period. Other than the three Ajisen restaurants in Fuzhou, Fujian, PRC and the three sub-franchise restaurants, we manage all the Ajisen restaurants in Hong Kong and the PRC. Under the Framework Agreement, we manage all the Ajisen chain restaurants owned by Shenzhen Weiqian which are situated in Chengdu, Wuhan and Guangdong Province. Most of the Ajisen chain restaurants in the PRC which are managed by us typically operate from 10:00 am to 11:00 pm daily, whereas those in Hong Kong operate from 11:30 am to 11:30 pm daily. Depending on the location, some of our chain restaurants have longer operating hours. Our restaurant staff in the PRC and Hong Kong work in overlapping shifts, each lasting 8 hours and 9 1 / 2 hours respectively every day. Each of our Ajisen chain restaurant is managed by a management team comprising at least one restaurant manager, one restaurant supervisor and one deputy restaurant supervisor. The restaurant manager is in charge of the overall operation of the restaurant and his general responsibilities include ensuring that the staff have been properly trained to provide quality service to our customers, and that the restaurant is adequately stocked and operating smoothly. Our restaurant management teams also work in shifts so that there is constant supervision at all our Ajisen chain restaurants. The number of service staff differs from restaurant to restaurant, depending on the size of the restaurant. As we do not manage the three Ajisen restaurants in Fuzhou, Fujian, PRC which are under the management of Fuzhou Weiqian, our restaurant management concept does not apply to these three restaurants. To the best of our knowledge and belief, we have not experienced any major disruptions to our Ajisen chain restaurant business. As at the Latest Practicable Date, Fuzhou Weiqian manages three restaurants situated in Fuzhou, Fujian Province, PRC. Fuzhou Weiqian is a joint venture company between our Subsidiary, Hong Kong Ajisen Food Company Limited (as to 60%) and Chan Chung Yung (as to 40%) who is an Independent Third Party. Under the joint investment agreement entered into between Hong Kong Ajisen Food Company Limited and Chan Chung Yung on 7th July 2003, the total investment and registered capital of Fuzhou Weiqian would be HK$500,000. Hong Kong Ajisen Food Company 116

23 Limited would contribute HK$300,000, representing 60% of its equity interest while Chan Chung Yung would inject HK$200,000, representing 40% of its equity interest. The board of directors would comprise 3 directors, 2 of whom would be appointed by Hong Kong Ajisen Food Company Limited and 1 by Chan Chung Yung. Chan Chung Yung would be the chairman of the board and the legal representative of Fuzhou Weiqian. Under the joint investment agreement and the Articles of Association of Fuzhou Weiqian, Hong Kong Ajisen Food Company Limited and Chan Chung Yung would share the risks and the profits of Fuzhou Weiqian. The board of directors is the highest authority and will decide on all important matters relating to Fuzhou Weiqian, including but not limited to production forecasts, approving the annual financial account, profit distribution, the appointment or removal of the senior executives such as the general manager, deputy general manager and chief accountant. Although we are the majority shareholder of Fuzhou Weiqian, and share the risks and profits of Fuzhou Weiqian in proportion to our shareholding, Chan Chung Yung actually has management control of Fuzhou Weiqian and manages it exclusively by reason of the following: (a) (b) (c) Fuzhou Weiqian is exclusively managed by Chan Chun Yung. All restaurant site selections, rental agreement negotiations, renovations and staff employment have all been solely decided by Chan Chung Yung and he has not consulted Hong Kong Ajisen Food Company Limited. Fuzhou Weiqian does not adopt the same menus, POS systems and management systems of the other Ajisen restaurants managed by the Group. Chan Chung Yung is the chairman of the board of Fuzhou Weiqian. Of the two directors appointed by Hong Kong Ajisen Food Company Limited, one director is not actively involved in board meetings and the management of Fuzhou Weiqian. The other director is Chan Chung Yung s wife. Hong Kong Ajisen Food Company Limited has never been given any audited or management accounts of Fuzhou Weiqian since its establishment and is not fully informed of its financial condition. We are in negotiations with Chan Chung Yung to request for more information regarding Fuzhou Weiqian and to see how we can work together with our joint venture partner in the management of the company and whether we would be able to acquire Chan Chung Yung s equity interest in Fuzhou Weiqian. In the event that we are unable to resolve the management control issues with Chan Chung Yung within six months from the Listing Date, we may apply for the liquidation of Fuzhou Weqian. Our investment of HK$300,000 in Fuzhou Weiqian, which is classified as Available-for-sale-investments of our Group in 2003, has been fully written off in the same year. 117

24 Our Food Manufacturing and Processing Centres In order to ensure consistent quality in the food we serve at our Ajisen chain restaurants, we have established food manufacturing and processing centres or facilities to assist us in the preparation and processing of ingredients, cooked and semi-cooked food items such as roast pork and dumplings for distribution to all our Ajisen chain restaurants. These food manufacturing and processing centres are located in Shanghai Factory and Shenzhen Factory as well as in Beijing, Shandong and Hong Kong where they can easily service our Ajisen chain restaurant and customer networks. The cooked and semi-cooked food for our Ajisen chain restaurants in Shandong are processed by an independent sub-contractor. For further details of our food processing centres, please refer to the paragraph on Our Packaged Food Operations below. 8. OUR PACKAGED FOOD OPERATIONS Our packaged food operations encompass the following: (1) manufacture and distribution of ramen to all our Ajisen chain restaurants and other independent Ajisen Ramen outlets located overseas; (2) manufacture and distribution of packaged noodle products to our distribution network consisting of distribution companies, supermarkets and other third-party restaurant operators; (3) preparation and processing of ingredients, cooked and semi-cooked food for our chain restaurants; and (4) preparation of our unique white soup condiments and packaged noodle products for our chain restaurants. As our business first started as a ramen-manufacturing operations, our first production facilities were operated by the Shenzhen Factory which was established in December As our business grew and we branched into the FCR business, we established the Shanghai Factory in March 2001 to meet the demands of our growing business. With a view to achieving greater efficiency and standardisation in food quality for all our Ajisen chain restaurants, we subsequently established food processing facilities in various parts of the PRC. We process all the food ingredients, semi-cooked and cooked food used in all our Ajisen chain restaurants, including the sub-franchised restaurants. Currently, we own food manufacturing and processing facilities in Shanghai, Shenzhen, Beijing and Hong Kong. Our food processing and manufacturing facilities are situated on a total site area of approximately 17,906.2 sqm, with a total staff size of